National Australia Bank's Q3 Earnings: Resilience Amid Rising Rates or Early Warning Signs?

The third-quarter 2025 earnings report from National Australia Bank (NAB) presents a nuanced picture of resilience and caution. With cash earnings of A$1.77 billion, a modest 1.1% increase from the prior year, the bank has navigated a high-interest-rate environment with a mix of strategic execution and operational discipline. However, beneath the surface, emerging trends in credit risk and cost pressures raise critical questions about the sustainability of this growth. For investors, the challenge lies in discerning whether NAB's performance reflects a well-positioned institution or early signs of strain in a tightening financial landscape.

Balance Sheet Strength: A Pillar of Resilience

NAB's capital adequacy ratios remain a cornerstone of its resilience. As of Q2 2025, the bank's Common Equity Tier 1 (CET1) ratio stood at 12.01%, comfortably above the APRA minimum of 10.25%, and its Total Capital ratio reached 21.02%. These figures underscore a robust buffer against potential losses, particularly in a high-interest-rate environment where margins and asset quality are under pressure. The recent AU$1.5 billion subordinated debt issuance, maturing in 2040, further strengthens NAB's capital structure. This Tier 2 instrument, convertible to equity under APRA's insolvency rules, aligns with regulatory shifts toward CET1 and Tier 2 instruments, reducing reliance on costly equity raises.

Liquidity metrics also reinforce NAB's stability. A Liquidity Coverage Ratio (LCR) of 140% and a Net Stable Funding Ratio (NSFR) of 116% (as of FY23) indicate a strong ability to meet short- and long-term obligations. These metrics are critical in a high-rate environment, where deposit volatility and funding costs can strain less prepared institutions.

Cost Discipline: Efficiency Gains vs. Rising Expenses

NAB's cost management has been a key driver of its performance. The bank continues to target productivity savings exceeding A$400 million in FY25, reflecting a disciplined approach to operational efficiency. However, operating expenses are now expected to grow by 4.5% in FY25, partly due to A$130 million in costs related to payroll remediation. This divergence between efficiency gains and rising expenses highlights a potential vulnerability. While the bank's cost-income ratio improved to 45.4% in FY23 (from 46.9% in FY22), further inflationary pressures or operational missteps could erode this progress.

Credit Risk Management: A Delicate Balance

The high-interest-rate environment has begun to test NAB's credit risk profile. Stage 3 loans (impaired loans) increased by 25% year-on-year to A$7.636 billion in FY23, representing 1.08% of total gross loans. While this remains relatively low by historical standards, the 24% share of Stage 2 loans (performing but at higher risk) signals early signs of stress, particularly in business and mortgage portfolios. The commercial real estate (CRE) segment, which accounts for 10% of total loans, has seen a slight deterioration in its impaired ratio to 0.37% of total loans, up from 0.22% in FY22.

NAB's proactive steps to address compliance risks—such as the cancellation of its Enforceable Undertaking (EU) by AUSTRAC—demonstrate improved governance. However, the bank's reliance on wholesale funding (26% of total non-equity funding) and its exposure to business loans (more sensitive to economic cycles) remain areas of concern.

Strategic Positioning: Growth in a Shifting Landscape

NAB's strategic focus on business and private banking has yielded tangible results. Business lending grew by 4% in Q3 2025, with a record June monthly increase of A$4.6 billion, while home lending rose 2%. These figures reflect the bank's ability to capitalize on its market leadership in Australia and New Zealand. However, the gradual improvement in proprietary channel drawdowns for home loans suggests that competition and customer behavior shifts could temper future growth.

The bank's optimism about long-term sustainability is justified by its strong deposit growth (6% over nine months to June 2025) and a diversified loan portfolio. Yet, the high-interest-rate environment's impact on borrower capacity—particularly for small businesses and homeowners—cannot be ignored.

Investment Implications: Weighing Risks and Rewards

For investors, NAB's Q3 performance offers both reassurance and caution. The bank's capital strength, liquidity, and cost discipline provide a solid foundation for navigating a high-rate environment. However, the rising credit risk metrics and operational costs highlight the need for vigilance.

Key Considerations for Investors:
1. Capital Resilience: NAB's CET1 ratio and liquidity buffers position it to withstand near-term shocks, making it a relatively safer bet in a volatile sector.
2. Credit Risk Monitoring: Investors should closely track trends in Stage 2 and Stage 3 loans, as well as provisions, to gauge the bank's ability to manage asset quality.
3. Operational Efficiency: The success of NAB's A$400 million productivity savings target will be critical in offsetting rising expenses.
4. Regulatory Alignment: The bank's proactive approach to compliance and capital structure reforms reduces long-term regulatory risks.

Conclusion: A Prudent Bet with Conditions

National Australia Bank's Q3 earnings reflect a resilient institution with a strong balance sheet and strategic agility. However, the modest growth in cash earnings and emerging credit risks suggest that the bank is not immune to the pressures of a high-interest-rate environment. For investors, NAB offers a compelling case of disciplined management and regulatory foresight, but its long-term success will depend on its ability to maintain asset quality and operational efficiency. Those with a medium-term horizon and a tolerance for moderate risk may find NAB's shares attractive, provided they monitor key credit and cost metrics closely. In an era of uncertainty, NAB's strategic positioning appears robust—but not infallible.